Learn Forex: Trading the Bull Flag Pattern

Short Term Strategies, Scalping, Price Action Analysis, and Risk Management

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Article Summary: The EURJPY has advanced as much as 236 pips to close last weeks trading. As price consolidates traders look to pricing patterns to spot possible points of trend continuation.

The study of technical analysis allows us to identify pricing patterns in order to extrapolate potential future market movement. One of the most useful patterns in a trending environment is used to spot continuations in price. Today we will look at identifying and trading the bull flag pattern in an established up trending market.

Learn Forex – Bull Flag Pattern

Identifying the Pattern

Identifying a bullish flag pattern can be easy once you know specifically what you’re looking for. The pattern itself is comprised of three different components. First we need to find the flag pole which will be identified as our initial advance in price. The angle of this advance does not matter and should be measured by calculating the distance from its previous low to its current high. Next we have the actual flag to consider. This is identified as a period of consolidation after the completion of prices initial advance. During this period, prices may slowly channel downward to retrace a portion of the initial move. At this point traders will wait for price to break back upwards towards higher highs in the direction of the trend.

After price begins to move lower again, we can then find the final component needed for trading a bearish flag pattern. The profit target is a potential value to take profit after a currency pair’s next decline in price. This pricing level can be identified by first measuring the distance in pips of our established flag pole. This value in pips can then be added from the low resistance line formed from our flag. Now that we know how to identify a bullish flag, let’s move to an example in today’s market.

Learn Forex – EURJPY Bull Flag

(Created using FXCM’s Marketscope 2.0 charts)

EURJPY Current Price

The chart above depicts a bullish flag pattern developing on the EURJPY 2Hour chart. The flag pole can be seen by identifying the November 28th low at 105.29 with the November 30th high at 107.68. Calculating the difference between our high and low, we find that the flag pole has advanced the EURJPY by 236 pips. From the formation of the high at 107.68, price has begun to consolidate. However, it should be noted that price is gradually declining so that we can see the flag pattern take shape.

It’s important to note that our pricing pattern will not be complete until price breaks out to a higher high signaling a resumption of the trend. At that point, we can use our 236 pip initial advance to establish price targets near 109.00. Potential stops upon the EURJPY breaking out can be placed below support of the flag drawn on our graph.

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